Videogame earnings: Esports are here to stay, but who is poised to make a killing?

Esports is dominated by a few titles, and most are not in the hands of the major publishers

MarketWatch photo illustration/iStockphoto, Getty Images

By

MaxA. Cherney

Tech reporter

Esports has grown from a largely ignored and occasionally lampooned hobby into a phenomenon that has attracted millions of fans online and at massive live events, as well as lucrative prime-time television deals.

The question for videogame publishers is how they will take advantage of esports now and in the future.

Heading into the June quarter, it’s worth watching what executives from videogame giants Activision Blizzard Inc.
ATVI, +1.09%
, Electronic Arts. Inc.
EA, +0.45%
and Take-Two Interactive Software Inc.
TTWO, +0.77%
, say about the sector that is expected to be worth billions in a few years. But at the moment, most of the market is being captured by a few titles owned by even fewer publishers — though as a Deloitte report indicates, there is still a considerable amount of room for growth.

“Right now, the entire esports business is under $1 billion,” Take-Two Chief Executive Strauss Zelnick said at a recent technology conference. “Small market. All of the money is going to ‘League of Legends’. So, you have all the money going to ‘League of Legends,’ which, just as a reminder, we do not own, and then like $0.30 going to ‘Overwatch,’ ‘Dota,’ and a few other things, and then even less than that going to us. And that’s just the truth.”

Of the big three publishers, Activision is the only one that own major intellectual property in esports: “Overwatch.” Otherwise, privately held Valve Corp. owns the “Dota” intellectual property and “League of Legends” is produced by Tencent Holdings Inc.
0700, -3.43%
-owned Riot Games.

Even though Take-Two isn’t making a ton of cash from esports at the moment, Zelnick says that in the near future, companies will have to determine via player and viewed demand what will make a strong esports title. “We do not think there is any room for, like, every one of your titles or our competitors’ titles turning into a professional esport, and we think it has to be pretty organic,” he said.

Videogame streaming isn’t quite here because nobody has quite cracked the problem arising from the tiny delays arising from bits flying back and forth between a player and data center. But, EA, Nvidia Corp.
NVDA, +2.07%
, Microsoft Corp.
MSFT, +1.25%
and a slew of startups are making substantial bets that it is coming.

EA reported Thursday after the closing bell. Activision and Take-Two both report Aug. 2 after the closing bell.

Activision Blizzard: Though some people are still reluctant to believe that esports is transforming into a massive, global business, a Blizzard announcement from earlier this month should make clear to even the skeptics that it is: ESPN, the Walt Disney Co.’s
DIS, +0.56%
flagship sports brand, is going to air Overwatch League during prime time on ESPN’s main station, as well as several other Disney-owned channels. KeyBanc analyst Evan Wingren wrote in a note to clients that he expects the increased exposure to translate into increased sales for new teams.

Activision’s second quarter is typically its smallest in terms of earnings and sales. There weren’t any major releases, because as with other major publishers it plans to release titles in the fall. For Activision that means big games like the latest in the Call of Duty franchise, “Black Ops IV,” which the company showed off at a June gaming convention and includes a battle royale mode.

Though they often get less fanfare in gaming press, King Digital, the makers of the Candy Crush franchise, among other things, will likely offset some of the typical second-quarter slowdown, wrote MKM Partners analyst Eric Handler. Even though monthly active users has declined slightly, revenue will likely get propped up by an increased player spend. Also, King has been testing video ads for mobile games, which could bring in additional high-margin revenue.

Take-Two Interactive: As Take-Two kicks off fiscal 2019, analysts are looking toward the future. “Grand Theft Auto V” may well have been the highest grossing media title of all time, but its sales didn’t contribute to last quarter’s earnings to the extent they previously had and executives have guided in that direction for this quarter. Still, the company continues to manufacture more online content for the game — there was a new release July 24 — and it has proven resilient in the past.

Looking ahead, “Red Dead Redemption 2” is slated for an October release, which MKM’s Handler says will help drive earnings per share beyond $4.35 — the title is widely anticipated, as the last game was an unexpected success both critically and in terms of sales. Analyst estimates range from roughly 10 million to 20 million units in the fiscal third quarter.

Investors should also look for commentary around the company’s catalog of evergreen sports titles such as “NBA 2K” and “WWE 2K.”

Take-Two’s Zelnick has said he doesn’t believe subscriptions are necessarily the industry’s future. It’s worth watching for any commentary that hints at a change in that view on the earnings call.

Wall Street uses EA’s operating data called “net bookings” to model the company’s top line; the company says net bookings are the total number of digital and physical goods combined. EA reported bookings of $743 million, down from $775 million in last year’s quarter.

Along with the results, EA reiterated its release slate for fiscal 2019, which includes several sports titles such as “FIFA 19” as well as its widely anticipated “Battlefield V” and “Anthem” which is the first title in a new concept that could become a franchise. EA delayed “Anthem” to 2019.

On the call with analysts, EA CEO Andrew Wilson briefly addressed esports and said, “Esports is bringing massive audience into the excitement of competitive gaming, and through our leading [intellectual property] we have global momentum that we will continue to expand with new competitions, new broadcasts, and more partners.”

A surprise announcement from the call was the company’s plans to launch its Origin Access Premier service next week — EA had previously said only “sometime this summer” — but that was not enough to mollify investors. Origin Premier is a subscription service that gives players unlimited access to EA’s newest titles as well as an extensive back catalog of games for $14.99 a month, or $99.99 a year.

Subscriptions offer the advantage of recurring revenue, but game companies risk hurting sales to some extent because they could sell fewer overall units. Microsoft and others offer the service too, though it isn’t acknowledged by everyone in the industry as the best idea.

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